Saturday, May 21

"Nothing in the fire house to help us short-term"

"Storm warnings," concluded John Batchelor in response to Jim McTague'sreport last night about the present state of the U.S. economy, which John titled for the podcast, "Recession speaking 2017." While some pay attention to the Baltic Dry Index for a clear sign of big economic troubles ahead, I watch the McTague Index, that being the frequency of Jim's visits to the John Batchelor Show. It can be a year or more without his making even one appearance -- then suddenly he can be on the show every week, as it's been for about the last month. Jim's remark about the fire house underscores that any kind of proposed fix to kick-start the U.S. economy, such as lowering taxes on corporations, will not work quickly and will itself cause dislocations in the short term, no matter how positive the long-term results. Recessions aren't in themselves bad; they're predictable if uncomfortable adjustments in the business cycle that purge a buildup of failed or hopelessly failing companies. The problem is when governments try to prop up the failures, leading to Zombie entities. That can create an entrenched recession, which could spiral into a depression. But the biggest problem is when a completely unforeseen situation piles on top of a recession -- as it did during the last one, when absolutely nobody knew the true size of the shadow banking system. Two mathematicians at the IMF eventually figured out where the miscalculations happened, which allowed them to peg the true size of the shadow system. But by then the true size of the shadow system had collapsed on everyone's head.This time around everyone knows a recession is on the way, but whether it's going to be mild or severe is the debate. Is there another Black Swan circling far above the heads of central bankers and just waiting for a recession before it makes itself known?It could be argued that the Black Swan has already appeared, in the form of a precipitous drop in the price of oil, but fooled everyone by arriving before the recession struck. Of course a much lower oil price is very positive for oil importing countries and in the long run even for those exporters who became dangerously dependent on profits from the one commodity, or abused the profits by investing them badly. However, it is the short term that's of greatest concern when recession settles in.There are other candidates for a calamitous event materializing around the onset of an recession but these are already under consideration, so if they occur they wouldn't be true Black Swan events:> China's economy taking a sudden nosedive and/or a coup against Xi Jinping> escalating military conflict between Russia and NATO exploding into war> escalating military conflict between the U.S. and China exploding into war, pulling in Japan> collapse of the European Union> collapse of Al Saud or a coup in the kingdom> contagion if oil-dependent exporting economies start to collapse in the manner of Venezuela> Trump making it to the White House. How he would govern is such an unknown that even if he does a great job in retrospect, just the uncertainty in that regard can lead to calamity next year.Then there is the simple fact that calamities attached to the last recession are still so fresh in everyone's mind that fears about an impending recession can touch off calamity. So it's one of those times when if nobody runs and nobody freezes in his tracks, fewer get hurt. Easier said than done to exemplify the advice in one's life, but it can be done.

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